Will the pandemic kill neoliberalism?

August 25, 2020 5:45 AM

The state’s new, expanded role is largely in partnership with the private sector

The role that the governments must play will depend on which economic ideology has the winning deck.The role that the governments must play will depend on which economic ideology has the winning deck.

By Ranveer Nagaich & Devashish Dhar

Economics tends to decentralise, whereas politics tends to centralise. Every crisis brings to fore the tension in the social contract in the society of which economics and politics (the state) are key pillars. This is more so the case when a crisis morphs into a full-blown economic predicament, as is the case with the ongoing pandemic. The economic impact of the pandemic was best captured in the euphemism ‘the fight between lives and livelihoods’. World over, we have seen an expansion in the role of the state; relief measures have been launched to battle the recession. The role that the governments must play will depend on which economic ideology has the winning deck.

When the world battled the Great Depression, Keynesian economics trumped Classical economics. Later, the stagflation of the 1970s and the elections of Reagan & Thatcher saw the rise of neoliberalism. Broadly speaking, neoliberalism has the contours of privatisation, deregulation, free trade, and austerity in government spending, with the private sector playing a far greater role in the economy. This also formed the core of the Washington Consensus.

Neoliberalism first came under major threat with the Global Financial Crisis of 2008. Unemployment, combined with corporate bailouts, led to the occupation of wall-street. ‘Too Big to Fail’ reflected the onslaught on neoliberalism. Now, Noam Chomsky has called the fallout from the pandemic “another colossal failure of the neoliberal version of capitalism”. Is this the end of neoliberal capitalism? Perhaps not.

The state can produce and provide goods and services. In India’s chequered tryst with socialism, the state has been a producer and provider of certain goods and services, with the redistribution of wealth and opportunities as the primary objective. Yet, poverty reduction took off only when the Indian state paved the way for neoliberal policies through economic reforms. The state continues to matter, but its role has evolved.

Even in the most neoliberal countries, the state has not receded into oblivion. In countries with universal healthcare, neoliberal policies dominate. Both the size of the state and its role matter. So, should the state be at the commanding heights of the economy, or should it limit itself to being a facilitator and regulator?

The role of the state hinges critically on what we can define as a public or private good. Public goods are non-exclusionary and non-rivalrous, private goods the opposite. Non-exclusionary means that someone cannot be excluded based on their ability to pay. Non-rival means that one person using the public good does not prevent another from using it. Then we have quasi-public goods, which can be either exclusionary or rivalrous. Public goods that are non-exclusionary, but rivalrous, lead to the tragedy of the commons. The depletion of India’s water levels is an example. In the case of publicly funded transport, the fares may be subsidised, but not free. So it is exclusionary but non-rivalrous. Most goods and services provided by the state are not pure public goods.

In the US, some Democrats are calling for an expanded role of the state. Publicly funded colleges, medicare for all are some examples. Their argument is that these are public goods; however, were made available to the population as private ones. In many developed countries across the world, health is treated as a public good or quasi-public good. Think of the National Health Service (NHS) in the UK or Canada’s Medicare. This is in contrast to the US model of private health insurance providers, or India, where 63% of the healthcare expenditures are out-of-pocket expenditures, according to India’s National Health Accounts for 2016-17.

As the pandemic continues to cast its shadow, we might be inching towards a major turning point. Comparisons have been made to the New Deal in the US or the post-war Labour Government in the UK. If so, then we could see the role of the state expand considerably. This will be unique as we will also see an increased importance of civil society. Universal basic income and contact tracing reflect the new realities—the return of the state will be consolidated after its emergence post-Global Financial Crisis.

This consolidation must not be looked at with the fear of crowding out. Singapore, New Zealand, and South Korea commended for their impressive response to the pandemic, are also some of the easiest places to do business. So too, are Norway & Sweden, with their universal healthcare systems. The public sector can thrive alongside private sector.

This is perhaps best exemplified in India as well. The private sector has massively scaled-up manufacturing of sanitisers, masks, PPE kits, ventilators, testing kits, while public and private hospitals have been providing treatment. Continued investments to strengthen health system are vital in building resilience.

MGNREGA and the National Infrastructure Pipeline will go a long way in bringing together public and private sector. Similarly, the reforms in agriculture will pave a new path for the private sector to deliver on high growth. Commercial coal mining is now a reality.

What are the tangibles that will create a fertile ground for this new role? We must appreciate that difference in capabilities or the ability to absorb existing technologies is a key explanation of cross-country income differences. Investments in physical infrastructure have to be complemented with investments in social infrastructure. Social welfare programmes can only be sustainably financed through stable tax revenues for which the private sector must stay vibrant. Stable tax revenues are also related to economic growth. Rising incomes will bring more people under the tax net. The increased formalisation will widen the corporate tax net. The pandemic consolidates the economic basis of the state, and this impression will continue to influence policymaking for this generation at least.

Nagaich is an Economist (Public Policy Consultant) & Dhar is a Public Policy Specialist in the Office of the Vice-Chairman, NITI Aayog. Views are personal

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